This quarterly report on Form 10-Q, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, particularly, our expectations regarding results of operations, the general economic environment, our ability to expand our market penetration, our ability to expand our distribution channels, customer acceptance of our products, our ability to meet the expectations of our customers, product demand and revenue, cash flows, product gross profits, our expectations to continue to develop new products and enhance existing products, our expectations regarding the amount of our research and development expenses, our expectations relating to our selling, general and administrative expenses, our efforts to achieve additional operating efficiencies and to review and improve our business systems and cost structure, our expectations to continue investing in technology, resources and infrastructure, our expectations concerning the availability of products from suppliers and contract manufacturers, anticipated product costs and sales prices, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, our expectations regarding the rationalization of our workforce and facilities, and our expectations regarding materials and inventory management. These forward-looking statements involve risks and uncertainties. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in the section entitled "Risk Factors" in this Report, our Quarterly Reports on Form 10-Q for the first and second quarters of fiscal 2009, our Annual Report on Form 10-K for the fiscal year ended June 29, 2008 and other filings we have made with the Securities and Exchange Commission. These risk factors, include, but are not limited to: fluctuations in demand for our products and services; a highly competitive business environment for network switching equipment; our effectiveness in controlling expenses; the possibility that we might experience delays in the development of new technology and products; customer response to our new technology and products; the timing of any recovery in the global economy; risks related to pending or future litigation; and a dependency on third parties for certain components and for the manufacturing of our products.

Business Overview

We develop and sell a family of modular and stackable secure network infrastructure equipment and offer related service contracts for extended warranty and maintenance agreements to Enterprise and Carrier customers. Substantially all of our revenue is derived from the sale of our networking equipment and related service contracts. In the third quarter of fiscal 2009, our revenues decreased $4.8 million, gross profit decreased $2.7 million, operating profit decreased $0.5 million and net loss increased $2.0 million as compared to the third quarter of fiscal 2008. In the nine months ended March 29, 2009, our revenues decreased $9.2 million, gross profit decreased $4.6 million, operating profit decreased $2.2 million and net income decreased $5.7 million as compared to the nine months ended March 30, 2008.

We believe that considering the following key developments will assist investors in understanding our operating results for the three and nine months ended March 29, 2009.

Increased Product Breadth

We believe that continued success in the marketplace will depend on our ability to develop new and enhanced products employing leading-edge technology. In fiscal 2008, we delivered to the market a new and expanded portfolio of stackable products, upgrades to our modular chassis products and enhancements to both our security and wireless portfolio, all targeted at the enterprise market. We also initiated the development of our next generation products for the metro service provider market.

Convergence of Voice, Video and Data

We have a vision of providing customers with cost effective solutions to build highly available and high performance converged communications infrastructure that can easily accommodate voice, video and data on a seamless wired and wireless network. We believe that demand for availability and performance; the continued acceleration in the convergence of voice, video and data; and the combination of both wired and wireless access are important underlying demand creators in the Enterprise market.

Business Environment

The credit market crisis and other challenges affecting economic conditions in the United States and other parts of the world has and will negatively impact demand for networking solutions long term, including Ethernet equipment, as Enterprises and Carriers decrease expenses, conserve capital and delay or cancel IT infrastructure plans.

However, we believe that increasing demand for bandwidth resulting from deployment of converged networks and adoption of electronic communications in all aspects of our lives will continue to drive demand for networking solutions. In addition, we believe that the Ethernet segment of the networking equipment market will continue to grow as Enterprises and Carriers continue to recognize the performance and operating cost benefits of Ethernet technology.

The market for network infrastructure equipment is highly competitive and dominated by a few large companies. Consolidation of vendors within the Ethernet networking market and with vendors from adjacent markets, including storage, security, wireless and voice applications, continues to gain in momentum. We believe that the underpinning technology for all of these adjacent markets is Ethernet. As a result, independent Ethernet switch vendors are being acquired or merged with larger, adjacent market vendors to enable them to deliver complete and broad solutions.

During the quarter, we reduced employee headcount by approximately 6%. As a result of these actions, we have recorded a restructuring charge of $2.6 million for severance, asset and facility charges partially offset by a $0.5 million adjustment resulting from additional sublease income related to prior restructuring charges, netting $2.1 million of restructuring charges for the quarter.

We have taken and plan to continue to take other steps to manage our business in the current economic environment. For example, we have managed our contingent work force, scheduled shutdown weeks, reduced travel and other discretionary spending, and restricted all hiring activities.

Stock Repurchase

We repurchased 28,571,428 shares of our common stock on September 19, 2008 at $3.50 per share. Total cash expenditures were $101.4 million for the shares repurchased, including direct costs associated with the repurchase. Primarily as a result of the share repurchase, our outstanding shares of common stock decreased from 116,867,768 as of August 29, 2008 to 88,635,762 as of March 29, 2009.

Results of Operations

During the third quarter of fiscal 2009, we experienced the following results:

• Net revenues of $77.2 million, compared to net revenues of $82.0 million in the third quarter of fiscal 2008.

• Total gross profit of 57.5% of net revenues, compared to 57.4% in the third quarter of fiscal 2008.

• Net loss of $2.2 million, compared to net loss of $0.2 million in the third quarter of fiscal 2008.

During the nine months ended March 29, 2009, we experienced the following results:

• Net revenues of $254.3 million, compared to net revenues of $263.5 million for the nine months ended March 30, 2008.

• Total gross profit of 56.8% of net revenues, compared to total gross profit of 56.6% of net revenues for the nine months ended March 30, 2008.

• Operating loss of $0.8 million compared to operating income of $1.4 million for the nine months ended March 30, 2008.

• Net income of $1.9 million compared to net income of $7.6 million for the nine months ended March 30, 2008.

• Cash used in operating activities was $4.0 million for the nine months ending March 29, 2009. Cash and cash equivalents, short-term investments and marketable securities decreased by $104.9 million in the nine months ended March 29, 2009 to $120.8 million, primarily as a result of $101.4 million used to repurchase 28,571,428 shares of common stock, cash used in operations of $4.0 million, capital expenditures of $4.2 million, offset by $1.9 million received for common stock purchases.

Net Revenues

The following table presents net product and service revenues for the three and
nine months period ended March 29, 2009 and March 30, 2008, respectively
(dollars in thousands):



                                Three months ended        Three months ended        Nine months ended        Nine months ended
                                  March 29, 2009            March 30, 2008            March 29, 2009           March 30, 2008
                                            % of Net                  % of Net                 % of Net                 % of Net
                                   $        Revenues         $        Revenues         $       Revenues         $       Revenues
Net Revenues:
Product                        $   62,017      80.33 %   $   67,388      82.10 %   $ 208,946      82.17 %   $ 218,960      83.10 %
Service                            15,185      19.67 %       14,642      17.90 %      45,330      17.83 %      44,562      16.90 %

Total net revenues             $   77,202     100.00 %   $   82,030     100.00 %   $ 254,276     100.00 %   $ 263,522     100.00 %

Net revenues were $77.2 million in the third quarter of fiscal 2009 and $82.0 million in the third quarter of fiscal 2008, representing a decrease of $4.8 million or 5.9% in the third quarter of fiscal 2009 from the third quarter of fiscal 2008. Net revenues for the first nine months of fiscal 2009 were $254.3 million, which is a decrease of $9.2 million or 3.5% from net revenues of $263.5 million in the first nine months of fiscal 2008.

Product revenue was $62.0 million for the third quarter of fiscal 2009 compared to $67.4 million for the third quarter of fiscal 2008, a decline of $5.4 million, or 8.0%. Product revenue was $208.9 million for the first nine months of fiscal 2009 a decrease of $10.0 million or 4.6%. The decrease in product revenue in the three and nine months ended March 29, 2009 compared to the three and nine months ended March 30, 2008 was primarily driven by lower sales in all geographies due to the global macroeconomic issues.

Service revenue was $15.2 million for the third quarter of fiscal 2009 compared to $14.6 million for the third quarter of fiscal 2008, an increase of $0.6 million, or 3.7%. Service revenue was $45.3 million for the first nine months of fiscal 2009 compared to $44.6 million for the first nine months of fiscal 2008, an increase of $0.8 million or 1.7%. The increases in service revenue for the third quarter of fiscal 2009 and for the first nine months of fiscal 2009 were primarily driven by higher maintenance revenue as a result of stronger maintenance revenue renewals in EMEA.

We operate in three regions: North America, which includes the United States, Canada and Central America; EMEA, which includes Europe, Middle East, Africa and South America; and APAC which includes Asia Pacific and Japan. The following table presents the total net revenue geographically for the three and nine month period ended March 29, 2009 and March 30, 2008 (dollars in thousands):

                                Three months ended        Three months ended        Nine months ended        Nine months ended
                                  March 29, 2009            March 30, 2008            March 29, 2009           March 30, 2008
                                            % of Net                  % of Net                 % of Net                 % of Net
                                   $        Revenues         $        Revenues         $       Revenues         $       Revenues
Net Revenues:
North America                  $   26,938      34.89 %   $   31,015      37.81 %   $  96,039      37.77 %   $ 113,129      42.93 %
EMEA                               38,464      49.82 %       38,187      46.55 %     122,235      48.07 %     104,752      39.75 %
APAC                               11,800      15.29 %       12,828      15.64 %      36,002      14.16 %      45,641      17.32 %

Total net revenues             $   77,202     100.00 %   $   82,030     100.00 %   $ 254,276     100.00 %   $ 263,522     100.00 %

In the third quarter of fiscal 2009, North America revenues were $26.9 million, a decrease of $4.1 million, or 13.1% from the third quarter of fiscal 2008. Product revenues decreased $3.8 million or 17.8% and service revenues decreased $0.2 million or 2.5% compared to the year ago quarter. In the first nine months of fiscal 2009, North America revenues were $96.0 million which represented a decrease of $17.1 million or 15.1% from the first nine months of fiscal 2008. Product revenues decreased $15.5 million or 18.4% and service revenues decreased $1.6 million or 5.6% from the first nine months of fiscal 2008. The decreases in the North America revenues compared to the third quarter of fiscal 2008 and the first nine months of fiscal 2008 is primarily the result of the economic downturn in the United States.

In the third quarter of fiscal 2009, EMEA revenues were $38.5 million, an increase of $0.3 million, or 0.7%, from the third quarter of fiscal 2008. Product revenues decreased $0.9 million or 2.7% and service revenues increased $1.2 million or 34.5% compared to a year ago quarter. In the first nine months of fiscal 2009, EMEA revenues were $122.2 million which represented an increase of $17.5 million or 16.7% from the first nine months of fiscal 2008. Product revenues increased $14.1 million or 14.9% and service revenues increased $3.4 million or 32.6% compared to the first nine months of fiscal 2008. The increases in EMEA revenues compared to the third quarter of fiscal 2008 and the first nine months of fiscal 2008 were primarily driven by an increase in service provider sales in Europe. The increases in service revenues for both periods were due to increased maintenance revenue as a result of increased focus on renewals.

In the third quarter of fiscal 2009, APAC revenues were $11.8 million, a decrease of $1.0 million or 8.0% from third quarter of fiscal 2008. Product revenues decreased $0.6 million or 5.5% and service revenues decreased $0.4 million or 24.3% compared to a year ago quarter. In the first nine months of fiscal 2009, APAC revenues were $36.0 million which represented a decrease of $9.7 million or 21.1% from the first nine months of fiscal 2008. Product revenues decreased $8.7 million or 21.5% and service revenues decreased $1.0 million or 18.2%. We believe the decreases in APAC revenues compared to the third quarter of fiscal 2008 and the first nine months of fiscal 2008 were primarily due to our execution challenges and the broader economic climate.

The level of sales to any one customer may vary from period to period; however, we expect that significant customer concentration will continue for the foreseeable future. Tech Data and Westcon EMEA accounted for 11.0% and 10.3%, respectively of the Company's revenue in the third quarter of fiscal 2009. Tech Data and Ericsson AB accounted for 10.3% and 10.0%, respectively, of the Company's revenue in the first nine months of fiscal 2009. Tech Data accounted for 10.8% of the Company's revenue in the first nine months of fiscal 2008. No customer accounted for greater than 10% of the Company's revenue in the three month period ended March 30, 2008.

Cost of Revenues and Gross Profit

The following table presents the gross profit on product and service revenues
and the gross profit percentage of product and service revenues for the three
and nine-month periods ended March 29, 2009 and March 30, 2008, respectively
(dollars in thousands):



                                 Three months ended        Three months ended        Nine months ended        Nine months ended
                                   March 29, 2009            March 30, 2008            March 29, 2009           March 30, 2008
                                               Gross                     Gross                    Gross                    Gross
                                               Margin                    Margin                   Margin                   Margin
                                     $           %             $           %             $          %             $          %
Gross profit:
Product                         $    35,875     57.85 %   $    40,262     59.70 %   $   121,260    58.03 %   $   129,539    59.20 %
Service                               8,543     56.26 %         6,841     46.70 %        23,281    51.36 %        19,639    44.10 %

Total gross profit              $    44,418     57.53 %   $    47,103     57.40 %   $   144,541    56.84 %   $   149,178    56.60 %

Gross profit was $44.4 million in the third quarter of fiscal 2009, a decrease of $2.7 million or 5.7% from $47.1 million in the third quarter of fiscal 2008.

Cost of product revenues includes costs of raw materials, amounts paid to third-party contract manufacturers, costs related to warranty obligations, charges for excess and obsolete inventory, royalties under technology license agreements, and internal costs associated with manufacturing overhead, including management, manufacturing engineering, quality assurance, development of test plans, and document control. We outsource substantially all of our manufacturing and supply chain management operations and conduct quality assurance, manufacturing engineering and document control at our facility in Santa Clara, California. Accordingly, a significant portion of our cost of product revenues consists of payments to our primary contract manufacturers, Flextronics International, Ltd. located in Guadalajara, Mexico and Alpha Networks, located in Hsinchu, Taiwan.

Product gross profit in the third quarter of fiscal 2009 was $35.9 million, representing a decrease of $4.4 million or 10.9% from the third quarter of fiscal 2008. As a percentage of revenue, product gross margin decreased 1.9 percentage points. The decrease in product gross profit was primarily driven by competitive pricing and changes in product mix totaling $5.1 million, offset by decreased distribution costs and expense controls of $0.7 million.

Product gross profit for the first nine months of fiscal 2009 was $121.3 million, a decrease of $8.3 million or 6.4% from $129.5 million in the first nine months of fiscal 2008. As a percentage of revenue, product gross margin decreased 1.1 percentage points. The decrease in product gross profit was primarily driven by competitive pricing and increased material cost of $9.8 million, offset by a decrease in excess and obsolescence costs and expense controls of $1.5 million.

Our cost of service revenues consists primarily of labor, overhead, repair and freight costs and the cost of spares used in providing support under customer service contracts. Service gross profit was $8.5 million in the third quarter of fiscal 2009, an increase of $1.7 million or 24.9% from $6.8 million in the third quarter of fiscal 2008. As a percentage of service revenues, service gross margin grew 9.6 percentage points. The increase in service gross profit in the third quarter of fiscal 2009 was primarily due to the use of written down inventory of $0.8 million, lower repair costs of $0.6 million due to improved quality and an increase in service revenues of $0.3 million primarily due to an increase in maintenance revenue in EMEA.

Service gross profit was $23.3 million for the first nine months of fiscal 2009, an increase of $3.7 million or 18.5% from $19.6 million in the first nine months of fiscal 2008. As a percentage of service revenues, service gross margin grew 7.3 percentage points. The increase in service gross profit is primarily the result of an increase of $0.4 million in maintenance revenue in EMEA, the use of written down inventory of $0.8 million, a reduction of customer specific warranty programs of $0.9 million and lower repair costs of $1.2 million due to improved quality. We believe service gross profit to continue to be positively impacted by the usage of written down inventory for at least the next three quarters.

Sales and Marketing Expenses

Sales and marketing expenses consist of salaries, commissions and related expenses for personnel engaged in marketing and sales functions, as well as trade shows and promotional expenses. Sales and marketing expenses decreased to $24.3 million for the third quarter of fiscal 2009 from $25.2 million for the third quarter of fiscal 2008, a decrease of $0.9 million, or 3.7%. This decrease was primarily driven by lower commission expense of $0.5 million, lower general sales and marketing expenses of $0.5 million, lower travel of $0.4 million, offset by a one-time, paid-time-off ("PTO") charge of $0.5 million. Sales and marketing expenses increased to $75.9 million for the first nine months of fiscal 2009 from $74.8 million, an increase of $1.1 million or 1.5%. The increase was primarily due to higher foreign exchange charges of $0.6 million, one-time PTO charge of $0.5 million, higher customer evaluation unit expense of $0.4 million, higher general sales and marketing expenses of $0.4 million, offset by lower commissions of $0.5 million due to lower sales volume, and lower stock based compensation of $0.3 million.

Research and Development Expenses

Research and development expenses consist principally of salaries and related personnel expenses, consultant fees and prototype expenses related to the design, development and testing of our products. Research and development expenses decreased to $13.9 million for the third quarter of fiscal 2009 from $15.6 million for the third quarter of fiscal 2008, a decrease of $1.7 million or 10.6%. The decrease was primarily due to lower project spending of $0.9 million, lower salaries and benefits of $0.5 million primarily due to a decrease in our variable compensation and PTO expenses and a reduction of $0.3 million as a result of our cost saving efforts.

Research and development expenses decreased to $44.5 million for the first nine months of fiscal 2009 from $49.2 million for the first nine months of fiscal 2008, a decrease of $4.8 million or 9.7%. The decrease was primarily due to lower salaries and benefits of $2.0 million primarily due to a decrease in variable compensation expense, decreased warrant amortization expense of $1.0 million, lower project spending of $0.8 million, lower depreciation expense of $0.5 million and a decrease in stock based compensation and other spending of $0.4 million. We expense all research and development costs as incurred.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, legal fees, professional fees and other general corporate expenses. General and administrative expenses decreased to $7.0 million for the third quarter of fiscal 2009 from $8.6 million for the third quarter of fiscal 2008, a decrease of $1.6 million, or 19.1%. This decrease was primarily due to lower litigation fees of $1.4 million, lower professional fees of $1.0 million, offset by higher salaries and wages of $0.3 million and contract labor and general expenses of $0.6 million.

General and administrative expenses decreased to $22.8 million for the first nine months of fiscal 2009 from $23.7 million for the first nine months of fiscal 2008, a decrease of $0.9 million or 3.8%. The decrease was primarily due to lower litigation fees of $1.6 million, lower stock based compensation of $0.4, lower general expenses of $0.6 million, offset by higher contract labor and professional fees of $1.7 million.

Restructuring Charge, Net of Reversal

During the fiscal third quarter of 2009 and fiscal year 2008 we recorded restructuring charges, net of reversal, of $2.1 million, and $0.9 million, respectively. The charges in the third quarter of fiscal 2009:

• $0.8 million related to our termination of 1% of our workforce, exiting a leased facility where the terminated employees worked and the write-off of impaired assets as part of our strategic plan. This restructuring was completed by the end of the third quarter of fiscal 2009.

• $1.8 million related to a reduction-in-force of a further 5% of our workforce to reduce operating costs and realign our organization in the current competitive operating environment. The reduction-in-force was executed in the third quarter of fiscal 2009 and is expected to be completed by the end of the fourth quarter of fiscal 2009.

These charges were offset by a reversal of $0.5 million of restructuring expense due to higher projected sublease receipt from a sublease renewal arrangement.

The charges in fiscal 2008 were for excess facilities charges and represented increases to the charges initially recognized during the fourth and third quarter of fiscal 2002, respectively due to changes in original estimates. The commercial real estate market continued to deteriorate through fiscal 2008, and we were not able to find suitable tenants to sublease these excess facilities necessitating additional charges due to lower projected sublease receipts.

Share-based Compensation Costs

Share-based compensation expense recognized in the financial statements by line
item caption is as follows (dollars in thousands):



                                                  Three Months Ended             Nine Months Ended
                                               March 29,      March 30,      March 29,       March 30,
                                                 2009            2008          2009            2008
Cost of product revenue                       $        93    $        125   $       109     $       351
Cost of service revenue                                79              65           173             182
Sales and marketing                                   420             424           923           1,225
Research and development                              387             415           848           1,131
General and administrative                            255             275           578             843

Total share-based compensation expense        $     1,234           1,304   $     2,631           3,732
Share-based compensation cost capitalized
in inventory                                            3               1            (4 )            (7 )

Total share-based compensation cost           $     1,237    $      1,305   $     2,627     $     3,725

In accordance with the Financial Accounting Standards Board ("FASB") Statement No. 123(R), the fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option valuation model with the weighted average assumptions noted in the table in Note 2 to the Condensed Consolidated . . .